Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Wednesday, July 06, 2016

Altera amicus brief

I've previously blogged about the appalling decision by the Tax Court in Altera v. Commissioner. This decision permitted U.S. IP companies that execute fake cost-sharing arrangements with their wholly owned tax haven affiliates - fake in the sense of existing only on paper, via the circular flow of funds - to avoid even having to "cost-share" (i.e., reduce allowable U.S. deductions) with respect to the incentive compensation that they pay their U.S. employees.

The decision invalidated Treasury regulations on the subject, based on the Tax Court's apparent misunderstanding, not just of administrative law, but even of basic transfer pricing principles relating to what one actually learns and doesn't learn, with regard to the economics of related party arrangements, by dint of looking at true arm's length deals. The relevant legal doctrine holds that the latter may illuminate the former, insofar as the circumstances were comparable. The Tax Court appears to misapprehend, in a really fundamental way, what comparability (and taking account of relevant differences) actually means.Altera therefore was not a specialist court's finest moment. One could understand some perplexity regarding the relevant administrative law doctrines, which have been in flux in the tax area recently, but the Tax Court's transfer pricing analysis should have reflected a higher level of understanding than it did. Worse still, Altera undermines, not just the tax treatment of myriad other cost-sharing arrangements - the revenue consequences of which could reach the billions of dollars - but also transfer pricing generally, and indeed Treasury regulations generally.

A number of us (by whom I mean legal academics) therefore felt it was important to add our voices to the appellate process. Otherwise, the Ninth Circuit might lend more credence to the Tax Court's analysis of the transfer pricing issues than that analysis actually deserves. We also realize that a whole lot of money has been flowing into challenging Treasury regulations - in Altera, the legal challenge appears to have been carefully planned and years in the making - and that no one with money to spend has an incentive to support the government's side.

Hence, at least two amicus briefs were filed this week,with 25 total signatories, explaining why the Ninth Circuit should reverse the Tax Court's decision in Altera. This brief, of which Clint Wallace was the primary author (and I am among the signatories) mainly addresses the "commensurate with income" standard in section 482 (mistakenly dismissed by the Tax Court as irrelevant). This brief, of which Susan Morse was the primary author, mainly addresses the arm's length standard.

Convincing the Ninth Circuit to reverse a 15-0 Tax Court decision on a relatively esoteric topic (from the non-specialist's perspective) is certainly a steep uphill climb. But I hope readers of these two briefs will agree that they make an intellectually overwhelming case for doing so.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.